For what it's worth..i can send you my update disk, i know that ti worked fine with my unit. No problems during my install of the new software.
PM me if ur interested.
PM sent, I tried 4 different times with 2 different brands of CD media. I would like to try a disk that is known good.
The really good thing is that restoring the backup partitions that I had on my pc brought the unit back from the update/reset loop I couldn't get out of. I tried updating it 3 different times, with 3 different burns from 2 different pcs and nothing is getting past 99%.
ducatiboy, try different media, that sounds like a read problem. I have NEVER found the speed in which you burn to be the culprit (even in xbox modding) this update worked fine for me the first time on media that I had used prev. for image editing in the d2, so I was sure it would read fine in this case..
I have seen it, although I might only think I have seen it. Burning PS2 backups, Xbox backups and DVD backups (all dvd) I think I have seen slower burns more compatible in more devices. Maybe I'm just nuts.
also, something to note about this update, it seems to have improved the ipod interface and its features. Such as the delay often complained about when searching through playlists and artists and such. It is noticeably faster now. Maybe because of a reset, maybe not. also, when flipping from one song to the next, it displays at the bottom of the screen MUCH faster what it is now playing.
Nice, now I want it all the more!
I had a look at the image itself, it has the label: 061011_1530.
This suggests that it was compiled by Pioneer on Oct. 11th, 2006 - which means that they've most likely decided to insert some code that disables Ducatiboy's flasher.
As much as I would like a big head and they are after me. I honestly think that they could care less about me. The problem is with their flash the lights thing, all the Z1 needs is for you to turn your headlights on at the correct time.
So you install the Z1 exactly like it says in the manual, you don't have the parking brake on, you start the car and right when you see the "starting pioneer navigation" text screen you turn on your headlights. If you do that, you can watch DVD's while driving and the Z1 is totally unlocked. Someone who doesn't want to watch movies while driving might accidentally stumble upon it and sue pioneer for the accident they have. They didn't want movies to play up front.
The update they did was make is so if you install it like the instructions say, there is no way you can view movies while driving. You have to disregard the "hook the parking brake wire like this" message and you have to modify the stock wiring harness. Nothing someone would stumble into accidentally.
This really sucks for anyone who bought the flasher (including me) and is looking for a fix for their "defective" Bluetooth unit.
Well rumor has it that you can do the ground 2 wires bypass and still have full functionality. Yes, it sucks that I sold these circuits to people who now might not need them, but you can still have an unlocked unit, you just need to change how you do it and throw out the flasher, or put it in a frame and mount it on the wall out of reverence! 
UPDATE
I just finished restoring my hard drive a second or third time. I've lost track, it's been just under 5 hours I have been messing with this so give me some slack. 
So far the 4 disks I burned don't work. I tried wiping my hard drive and starting over and then doing the update but that didn't work.
What I did learn is that a level 3 reset will kill your cell phone list, but keep your music, address book, phone book, recent phone calls, destinations, etc. While a level 4 reset will wipe out everything.... Factory Fresh Baby!
I did re-pair my phone and my wife's phone with the volume down to try that since the update isn't working for me right yet. I have a PM to dsrtlawman and hopefully he will send me his known working CD, to take that out of the equation. But in the mean time I want to take tillithz's advice and I will try to gather a couple other brands of CD rom to try burning this on to and see if that helps.
I'll update you guys here if I learn anything.